Crony Nation

THIS IS THE CENTURY OF THE RULE OF LAW. In the 20th century, that wasn’t thought so important, and Milton Friedman argued that to succeed, all a country need do was shrink the state by privatization:

Just after the Berlin Wall fell and the Soviet Union collapsed, I used to be asked a lot: “What do these ex-Communist states have to do in order to become market economies?” And I used to say: “You can describe that in three words: privatize, privatize, privatize.” But I was wrong. That wasn’t enough. The example of Russia shows that.… Privatization is meaningless if you don’t have the rule of law.

Friedman’s prescription for growth was an important component of what came to be called the Washington Consensus, a set of classically liberal policies that dominated the literature about economic development after the fall of Communism. Apart from privatization, other elements included deregulation, free trade, and low taxes. Property rights came in last on the list. As Friedman and others came to realize, however, this ignored the crucial role of social and legal institutions in promoting growth.

The recognition that institutions matter came to be called neo-institutional economics. Neoinstitutional scholars argued that changes in growth patterns could not be explained without recourse to cultural differences. For example, Ghana and South Korea had very similar economies and per capita GDP in the 1960s. Thirty years later, the South Korean per capita GDP was 15 times that of Ghana.

Culture encompasses such things as the private virtues of fidelity, thrift, and industry; the social norms of promise-keeping and trust; and the practice of religion. One important component is legal culture, or the rule of law. Brookings Institution fellow Daniel Kaufmann reports that rule-of-law variables are associated with significantly better development outcomes:

[A]n improvement in the rule of law (or, say, control of corruption) from relatively poor to merely average performance would result in the long run in an estimated fourfold increase in per capita incomes, a reduction in infant mortality of a similar magnitude, and significant gains in literacy.

So how does the U.S. fare on measures of the rule of law? Well, let’s start with an attempt to define it. The rule of law might mean several different things, but one thing it’s not is the rule of men. That definition goes all the way back to James Harrington’s Oceana in 1656, which defined his ideal commonwealth as a government “of laws and not of men.” Under the rule of law, it shouldn’t matter whom you know and which party you support.

I very quickly learned, when I moved to the U.S. more than 20 years ago, that whom you know does matter here, in ways I would never have expected. We rented a house in northwest D.C., which, as it was newly built, did not have a city trash can. We called the city for one and, as we waited for its arrival, put out our garbage in big black plastic bags. This went on for some time, to the delight of the local squirrels And raccoons, but eventually, the scraps of food on the sidewalk began to annoy the neighbors, one of whom asked me why I didn’t have a trash can. When I told him that I had called the city, he laughed. “That’s not how you do it,” he said. “You have to call your D.C. council member. Here’s the number.”

I was astounded. I could well have understood the necessity to contribute to the mayor’s reelection campaign were I a real estate developer, but the idea that politics reached all the way down to trash cans revealed a level of painstaking corruption that a Russian would envy. That’s the District, of course. We wouldn’t expect it to be squeaky clean. But compare how the U.S. ranks against other countries on Transparency International’s 2011 Corruption Perceptions Index.

The index measures how corrupt government officials are perceived to be, and is based on sample questions about things like bribe-taking and the use of public office for private gain. A similar measure of corruption, by the World Justice Project, ranks the U.S. tenth out of 12 peer countries in North America and Europe. Moreover, this likely understates America’s corruption problem, when corruption is understood to include wasteful lobbying. What bribes are for poor countries, lobbying is for rich ones: a means of obtaining political influence with money. No other country has anything like the number of American lobbyists, who load up legislation with interest-group bargains.

AMERICA'S RANKING ON MEASURES of corruption is nothing to write home about, and we can expect it to get worse before it gets better, for three reasons.

First, the size of American government has greatly increased, and with it the opportunities for public corruption. As the state gets bigger, there’s simply more booty to pass around, and it’s easier to hide the plunder in obscure regulations. Twenty years ago, U.S. government (federal, state, and local spending as a percentage of GDP) was a lot smaller than that of comparable First World countries. As of 2010, the difference is small, thanks to George W. Bush and especially Barack Obama.

Second, the crony capitalism of the Obama administration has taken Chicago-style politics national and raised corruption to an entirely new level. In the 19th century, patronage was restricted to hiring policemen and postal workers to do things that the state should properly do. That was chicken Feed. Now it’s a game played with billions of dollars of bailout money for things the state shouldn’t do — for green energy, union-represented firms, and other Democratic donors. Or with waivers to friends and special perks for trial lawyers.

The third reason we can expect the corruption problem to get worse is the absence of monitoring or oversight by the media and watchdog groups. The conservative media reports these things, but the partisan media on the left, which dominates the conversation, is focused on more important issues than economic decline. Sure, that matters, but what’s really important right now is same-sex marriage, the war on women, and justice for illegal aliens. As for ostensibly nonpartisan government ethics groups such as Common Cause, they’re too busy trying to eliminate Republican money in politics.

Since prosperity is so dependent on the rule of law, all this is troubling from an economic perspective. Quite apart from economic calculation, most Americans are disgusted by the level of corruption and the hypocrisy of the mainstream media on the issue. That disgust fueled the McCain campaign in 2000 and fuels the Tea Party movement today. It’s a moral and emotional response to an economic issue, and it’s an example of how social and economic issues are joined at the hip. The Romney campaign would do well to make this their issue as well. Elections are not won by financiers who talk about numbers but by patriots who decry the rogues who plunder our country.

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